BOIL: Consider Peak Natural Gas Demand Season Approaching (NYSEARCA:BOIL)

Natural gas is a combustible energy commodity, and its price action in the futures market (NG1:COM) can be equally explosive and implosive. In 2022, Russia’s invasion of Ukraine caused UK and Dutch natural gas futures to explode to record highs. In In August 2020, US natural gas futures prices rose to their highest level since 2008 at just over $10 per MMBtu. However, the energy commodity has run out of steam over the past two years, with the price falling below the $2 level before recovering.

As the natural gas market heads into peak demand season in the coming months, this could be a great time to put natural gas on your trading radar. The ProShares Ultra Bloomberg Natural Gas ETF (NYSEARCA: HOT) provides leverage for the nearby US natural gas futures price. Leverage comes at a high price, as decay over time erodes the ETF’s value when the price does not rise.

Natural gas is headed for peak season

In November, the natural gas injection season during which US inventories rise will turn into the withdrawal season, with winter being the peak season for demand for energy commodities. Although prices tend to reach seasonal highs during the winter, they remain under pressure in early September 2024.

The ten-year chart highlights the 84% decline in nearby NYMEX natural gas prices from $10.028 in August 2022 to the ongoing contract low of $1.60 in February 2024.

Below the $2.30 level since early September, nearby natural gas futures remain well below the 2022 high.

Prices have stabilized above $2 – Forward curve reflects seasonality

After falling from a high of $3.254 on June 11 to a low of $1.991 per MMBtu on August 5, natural gas broke above the $2 level.

The six-month chart of NYMEX natural gas for October delivery illustrates that while prices are trending lower, they have remained above the $2 level since the August 5 low.

Meanwhile, the forward curve shows the price for January 2025 delivery at $3.405 is 50% above the October futures price of $2.270 per MMBtu. The significant forward premium for January 2025 delivery reflects the seasonality of natural gas during the peak heating season.

Inventories remain high – Above last year and five-year average – Rig count down

High inventories have caused low natural gas prices.

The chart shows that 3.347 trillion cubic feet of natural gas was stored in the United States at the end of August 2024. Inventories were 6.6% above last year’s level and 10.7% above the five-year average as of mid-August. They are already above the level at the end of the 2018 injection season, which was 3.234 trillion cubic feet. High inventory levels have weighed on U.S. natural gas prices.

Meanwhile, according to Baker Hughes ( BKR ), 95 natural gas rigs operated in North America in the week ending Aug. 30. That’s nineteen fewer than the 114 rigs that were operating at the same time in 2023. The low rig count and high inventory level present conflicting data for the path of least resistance for prices.

The war in Ukraine and the US election could affect natural gas supplies and prices

Technological advances in U.S. natural gas production and processing in recent years have created an expanding market for natural gas liquids carried by ocean-going vessels around the world.

In the past, natural gas exports were limited by the US pipeline network. LNG allows energy commodities to travel the world in liquid form to regions with high prices. The main natural gas producing countries in the world are:

The US and Russia were the world’s top natural gas producers in 2023, with Iran and China in third and fourth place. Europe depends on Russian natural gas exports for winter heating requirements. Meanwhile, the war in Ukraine led Russia to limit exports to “unfriendly” Western European countries supporting Ukraine. Fortunately, European weather conditions during the winters of 2023 and 2024 have been mild, causing UK and Dutch natural gas futures to decline from record highs in 2022. However, the seasonally warm temperatures of the past two years are not a guarantee that the winter of 2024-2025 will not be colder, increasing demand for heating and natural gas.

In recent years, US natural gas futures prices have become more sensitive to European and Asian prices due to the booming LNG business. Therefore, a cold European winter, causing higher prices and shortages, could cause US natural gas futures to rise in the coming months.

Meanwhile, natural gas is on the US ballot in November, and the future of US energy policy depends on the outcome of the election. Democrats favor addressing climate change by limiting fracking and drilling, which will reduce oil and gas production. Republicans favor a return to the Trump administration.drill-baby-drill” and “frack-baby-frack” policies. Uncertainty over future US energy policy could cause volatility in the natural gas futures arena in the coming weeks and months as peak season and inventory drawdowns begin.

BOIL is a short-term US natural gas ETF product

Natural gas prices are low, below $2.30 per MMBtu, but the forward curve reflects higher demand, with prices around $3.40 per MMBtu for January delivery. The most direct route to a risk position in the volatile US natural gas market is futures options and futures on the NYMEX division of the CME.

While the United States Natural Gas Fund ETF (UNG) tracks short-term price action in the US natural gas futures arena, the Ultra Bloomberg Natural Gas 2X ETF turbocharges UNG price action.

At $9.38 per share, BOIL had nearly $600 million in assets under management. BOIL trades over 11.276 million shares on average daily and charges a management fee of 0.95%. The BOIL ETF is only suitable for short-term and long-term risk positions, as leverage causes a decrease in time. BOIL loses value when natural gas prices fall or remain flat. Therefore, any long positions in BOIL require timing and price stops to avoid losses. Moreover, BOIL’s low timing causes periodic reverse splits that destroy value and cause the leveraged ETF to become a dust collector in portfolios when market participants overstay their welcome in the product. These risks could cause you to lose all your capital. Please familiarize yourself with the special risks of leveraged ETFs by reading this SEC Bulletin.

The latest increase in NYMEX natural gas futures for October delivery pushed the price up 21.6% from $1.991 on August 5 to $2.421 on August 15.

As the chart shows, BOIL rose 35.8% from $8.13 to $11.04 per share over the same period as the leveraged ETF outperformed October futures on a percentage basis. In addition to value-destroying time drops, BOIL only trades when the stock market is open, while natural gas futures trade around the clock. BOIL may miss highs or lows when the stock market is closed.

Risk-reward and seasonality favor growth in the US natural gas arena, but the forward curve already reflects higher prices for the peak winter month. However, even if January 2025 prices are at $3.40, they remain well below the August 2020 peak, the highest level since 2008. Natural gas is one of the most volatile commodities and could attract plenty of seasonal action as winter approaches. The ongoing war in Ukraine and the US election could supercharge the already volatile commodity in the coming weeks and months.